Reliance buys stake in East India Hotels for $217.5 million

India’s richest man, Mukesh Ambani, checked into the Oberoi on Monday.
As a saviour of the hotel chain’s founders or as a camel in the tent? Looks like the former, say experts.

On the face of it, the Reliance Industry (RIL) move on Monday to buy 14.12% stake in East India Hotels, promoted by the Oberois, by paying Rs1,021 crore, looks like helping the founders establish a detente, because ITC, the tobacco-to-hotels giant that’s also a business rival, holds 14.98% stake, perilously close to the open-offer trigger, in the company.

The shares were acquired through RIL’s wholly owned subsidiary Reliance Industries Investment and Holding Pvt Ltd from Oberoi Hotels Pvt Ltd and certain other promoters of East India Hotels (EIH) Ltd.

With this acquisition, the EIH promoter family stake comes down to approximately 32% from 46.43%.

Himani Singh, analyst (hotels), Elara Capital, said the objective behind this deal certainly looks to be to keep ITC at bay. “I think it’s been structured in that way as well.”   

“It works very well for the promoters as the kind of premium being paid also enhances the company’s overall valuation which currently is fairly undervalued,” Singh said.

Speaking on valuations, Rahul Gaggar, analyst (hotels), Centrum Broking, said RIL has paid a premium of 21% to Monday’s price of the EIH share, and a 35% premium to Friday’s closing.

RIL officials said the stake acquisition has been done due to excellent future prospects.

On the possibilities of a hostile takeover, ITC chairman YC Deveshwar had said at various times that the 14.98% in EIH and around 7.4% in Hotel Leelaventure were part of ITC’s treasury operations and that he would never resort to a hostile takeover.

ITC officials were not available for comment.

RIL intrinsically is unlikely to look at this as an investment since the hotel industry hasn’t been exactly known to deliver significant returns to investors, said an analyst.

“The deal surely is Biki Oberoi’s second attempt to refrain ITC from taking control of the chain. Earlier, EIH had walked the road with Analjit Singh (who holds close to 5%) to bring him as a strategic partner. But prolonged talks with him were called off many months ago,” said the analyst.

Another senior hospitality industry executive, on the condition of anonymity, said considering RIL’s financial and political clout, ITC will have to think twice before even attempting a hostile takeover.

“What the deal also does is bring peace of mind to the EIH management, which can now focus on their business and shareholders with takeover fears mitigated,” this person said.

For RIL, it will be a win-win since an open offer from ITC could bring in good returns.